The idea of reverse gas flow from Europe to Ukraine raises lots of questions, says Gazprom CEO Aleksey Miller, as the physical reverse flow is hardly possible and a virtual one questions the legality of the reverse flow itself.

“We very much doubt whether reverse flow from Slovakia to,
say, Donetsk, Kharkov or Kiev is physically possible,”
Gazprom CEO Aleksey Miller said in an interview with Russian NTV
channel.

According to Miller, the pipe “can’t have gas flowing in both
directions at the same time,” that’s why it cannot be a
physical reverse flow but a virtual one on paper, “which
questions those who gave Ukraine the right to control Gazprom gas
in the Ukrainian pipe.”

“Our terminals are in Europe. We will certainly look very
carefully into that to see if this scheme is legal. I think this
issue requires careful study and consideration. For example, I
think that the European companies that plan to supply gas to
Ukraine through such reverse flow should think twice whether such
transactions are legal,” said Miller.

The issue of the reverse gas deliveries was raised by Ukraine’s
coup-appointed PM Arseniy Yatsenyuk who said on Wednesday that
Ukraine is looking forward to a political decision by the EU to
start reverse gas supplies from Slovakia. Yatsenyuk also added on
Saturday that Ukraine may get up to 20 billion cubic meters of
reverse gas from Slovakia, Poland and Hungary.

Miller pointed to a huge debt which Ukraine owes Russia due to
the fact that Moscow was paying in advance for the stationing of
the Black Sea fleet in Sevastopol after 2017.

“Ukraine has been underpaying the Russian Federation $100 per
1,000 cubic meters. Since the signing of the Kharkov Accords,
this discount amounted to $11.4 billion,” he says.

Under the Kharkov agreement signed on April 30, 2010 Russia
guaranteed Ukraine a $100 per 1,000 cubic meters gas discount in
return for using the Sevastopol port to host its naval fleet.

“That’s the amount that was not paid to the Russian
government,” says Miller, “That’s the money that Russia
has not received. That’s pensions, salaries for public employees,
social benefits, etc. This is a huge amount of money.”

According to Miller, as there are no Kharkov accords anymore,
“the contract is void.”

“Russia has been paying for the lease of the Black Sea
Fleet’s naval base in Ukraine, in Sevastopol, after May 2017. In
other words, Russia had been making a prepayment. Thus, Ukraine
now owes Russia $11.4 billion. And the Russian government
suggests that we think about ways to settle this debt,” he
adds.

Rise of gas price from $268.5 to $485 ‘was not a surprise for
Ukraine’

The Ukrainian authorities had two discounts for buying Russian
gas. The first one followed the deal between Russia and Ukraine
in December, when Moscow offered Ukraine’s Yanukovich-led
government a $15 billion loan and a 33 percent discount on
natural gas, a lifeline to help its faltering economy. The
natural gas discount was subject to review each financial
quarter.

On April 1, when the quarter ended, Gazprom said it cancelled
this discount and announced that the price for gas exports to
Ukraine returns to $385.50 per 1,000 cubic meters. According to
Miller, it followed Ukraine’s default on its obligation to repay
its debt for gas supplies in 2013 and the 100 percent lack of
payment for supplies in March.

The second $100 discount was under Kharkov agreement. On April 2,
Russia cancelled it after the Kharkov agreement was denounced, so
Ukraine will have to pay $485 per thousand cubic meters starting
April.

“The Ukrainian budget was based on the understanding that gas
costs $485 [per 1 thousand cubic meters],” says Miller.
“This proves that Ukraine recognizes this as a market price,
recognized the current contract and is willing to pay this price
for our gas,” he says.

“Indeed, some time ago we offer Ukraine a substantial down
payment for the transit of our gas to Europe. In fact, this has
been helping Ukraine pay for the deliveries of Russian gas,”
added Miller.

According to Miller, if Ukraine doesn’t fulfill the agreement,
then there won’t be any discounts on gas, said Miller. And
Ukraine hasn’t fulfilled its duties.

Meanwhile, Gazprom CEO says that Ukraine has no objections about
the rise in the gas price as it knew about the conditions of the
gas deal.

The new govt in Kiev are exactly those people who signed gas
contracts with Russia

“What’s most striking is that the current government in Kiev
consists of the people who took part in the drafting and signing
of the contracts that are in place today. I mean Yury Prodan, the
Minister of Energy of Ukraine Yury Prodan,” says Miller.
“He was part of the delegation headed by Yulia Timoshenko and
took part in the negotiations.”

According to Gazprom CEO, “these contracts were signed in
Prodan’s presence.”

“Prodan knows very well all the terms and conditions of these
contracts; he also knows perfectly well the pricing
mechanisms,” says Miller.

Miller said they had a talk with Prodan just a couple of days ago
as they discussed the gas supply partnership.

“I would like to emphasize that Prodan personally took part
in those contract negotiations which took place in Moscow; he
took part in the final stage of the negotiations and the signing
procedure of the gas supply contracts,” says he.

However, it seems that Ukraine’s Energy Minister has forgotten
about the gas talks as on Saturday he said that Ukraine will ask
the Arbitration Institute of the Stockholm Chamber of Commerce to
review the price of Russian gas.

Meanwhile, it is not only Energy Minister who was aware of the
details of the gas deal with Russia. Current PM Arseny Yatsenyuk
also knew about the possibility of raising the prices.

“It is also worth mentioning that the current prime minister
of Ukraine Arseny Yatsenyuk was at the time a Verkhovna Rada
deputy and also was very well acquainted with the government’s
actions and activities steered by Yulia Timoshenko,” says
Miller.

Another deal - another debt

Ukraine, which imports about half its natural gas from Gazprom,
owes the company $1.7 billion for gas that has already been
delivered in 2013 and 2014.

“In 2013 Russia gave Ukraine $3 bln, they returned only $1, 3
at a slow pace,” said Miller, adding that Russia “hasn’t
received a dollar from Ukraine in March!”

Gas contracts ‘were designed long-termed’

Gas contracts with Ukraine were signed in January 2009 and were
designed “to ensure supplies for the long term, for ten years
to be precise,” according to Gazprom CEO.

“The first one sets conditions for supplies to Ukraine and
the other for gas transit to Europe through Ukraine. The key
parameters of these contracts rely on market principles,” he
adds.

According to the first contract, the total annual volume is 55
billion cubic meters of gas.

“That is Ukraine can buy up to 55 billion cubic meters of gas
and Gazprom shall have the necessary capacity to meet this
demand,” he says.

According to Miller, Ukrainian side “never challenged the
validity of the current agreements.”

“January 2014 marked 5 years since the contracts were signed,
we got the payment and the Ukrainian side never challenged the
validity of the current contracts,” says Miller,
“Furthermore, in 2010, as part of the cooperation agreement
signed between Russia and Ukraine in Kharkov, the Russian
government cancelled the exports customs fee and a supplement was
signed to incorporate that change.”

However, Gazprom CEO explained that the company cannot deliver
gas directly to the customers in Ukraine.

“As for Ukraine’s market, we do not have the opportunity to
deal in end customer deliveries there. We only have on wholesale
buyer, the Naftogaz. It is the sole buyer of all of our
gas.”

Why Germany has more discounts on gas

Meanwhile Miller noted that despite difficulties with Ukrainian
market, Gazprom may deal with the end consumers of gas in the EU,
particularly in Germany.

According to Miller, Gazprom sells “very significant volumes
of gas directly to the end consumers in the German market.”

“That is why it would be incorrect to compare the gas prices
set by Russia in Germany with the prices in Ukraine,” he
says.

He also noted the contribution which Germany provides for Russian
Gas Company.

“Another factor that should be taken into account here is
that our German partners have made significant investments into
Russia’s gas industry and are our partners to many production
projects in Russia,” he added.